Platform Entry and Vendor Competition in On-Demand Economy

Abstract

We consider an on-demand delivery system with multiple competing vendors and examine the impact of introducing a delivery platform on their competition. Customers have preferences for differentiated vendors while also being sensitive to the overall cost of both the food price and the delivery fee. They place orders from a vendor only if they can be delivered within a specified delivery window. Each vendor strategically decides whether to participate on the platform, build its dedicated delivery fleet (i.e., employing in-house delivery), or not offer any delivery option (i.e., exclusively serving local customers as an outside option) to maximize its profit. Vendors who build their own dedicated delivery fleets decide on both the food price and delivery fee. Vendors who choose to participate on the platform set their food price, while the profit-maximizing platform sets the delivery fee and takes a commission from the vendors' revenue. We solve for the system equilibrium and benchmark it against the system without the platform. Our findings indicate that the introduction of the platform either intensifies vendor competition, leading to lower vendor profits and higher individual customer surplus, or conversely, alleviates vendor competition, leading to higher vendor profits and lower individual customer surplus. The intensifying or alleviating role of the platform on vendor competition hinges on the competitive environment of the market in which the vendors operate. We characterize conditions under which the platform's equilibrium strategy involves subsidizing per-order delivery to encourage vendor participation. However, perhaps surprisingly, the seemingly appealing per-order delivery subsidy (offered by the platform to attract vendor participation) hurts vendors by encouraging them to engage in more intensified competition, ultimately diminishing their profits. Conversely, if the platform derives profits from per-order delivery, introducing the platform alleviates vendor competition and benefits vendors. Therefore, the platform-enabled sharing of couriers can improve delivery efficiency and lower delivery costs but may intensify vendor competition through per-order delivery subsidy, placing them in a prisoner's dilemma that ultimately lowers their profits. These insights also apply to an e-commerce platform that provides storage and fulfillment services with economies of scale enabled by aggregating the business of sellers operating on the platform.